Sir Fred might have gone away, but the issue of bankers' bonuses sticks with us

The timing of Sir Fred Goodwin's decision to hand back some of his pension is fascinating. Why now, when the furore over his gilt-edged retirement fund had more or less died down?

The official reason was that he was waiting for the results of an internal inquiry into his conduct and his expenses. Having been completely exonerated of expenses misdemeanours, despite his use of the company jet and his suite at the Savoy - which puts him one up on hundreds of MPs - he decided to do a deal. It means that his gesture cannot be interpreted as an admission of guilt, but being given the all-clear after an exhaustive investigation might just as easily have bolstered his earlier insistence on not handing a penny back.

He may have been daunted by the prospect of being sued by RBS, though the bank had little chance of winning a case, fighting a legal action would still have been expensive and bruising for him and his family. Presumably Fred would like to be able to come back to Scotland without being lynched, though exile in the South of France, where he was discovered by the News of the World last weekend, does not sound so bad compared with, say, the banishment of former Yukos oil executive Mikhail Khodorkovsky to a Siberian jail after he upset Vladimir Putin.

Perhaps a more pertinent question is why winning the Battle of Fred's Pension was so important to RBS, or rather to UK Financial Investments Ltd (UKFI), the body set up by the government last November to run its bank shareholdings, which has been pulling the strings.

One reason is that pay and bonuses will be a hugely sensitive issue from now on. As a major shareholder with a public mission, UKFI has a responsibility to make sure the banks are better run, that their capital bases are rebuilt, their risk management is far more prudent, their boards are restocked and that pay and bonus structures are far more intelligent. At the same time, the scale of its task in extricating the British taxpayer is enormous; the exit process from the broken banks will be bigger than all the 1980s and 1990s privatisation programmes put together. At its peak, RBS's balance sheet, courtesy of Fred, was bigger than Britain's.

So if RBS's new chief executive, Stephen Hester, and his counterpart at Lloyds Banking Group, Eric Daniels, are to get us out of this mess, then UKFI reckons they deserve to be paid a lot of money. It has been in talks with RBS about a new bonus scheme for Hester, which is expected to be announced shortly. Having the issue of Goodwin's pension still festering would have been unhelpful, to say the least.

If Hester and Daniels do achieve a profitable exit for the taxpayer, they will deserve our gratitude, but it still feels jarring to be dangling super-sized rewards in front of them, even if they are payments for success; as taxpayers, most of us want a new kind of banking, so why endorse old-style rewards?

The cultural problem for the finance industry is that bloated bonus structures proved to be a lure not for the most talented but for the greediest. One senior director aptly calls pay-obsessed investment bankers the "compensation Taliban". There seems little chance of changing that ethos if there are no public-spirited bankers out there who can be persuaded to save Britain's financial sector without further enormous and unnecessary self-enrichment.

The task of reining in pay is made harder by the fact we see Goldman Sachs resurgent; it and the likes of JP Morgan Chase could see a further concentration of power and wealth in their hands now that the competition has been felled.

Bankers' pay is a problem in itself, but it is also a symptom of an underlying issue about ownership. We can have boardroom rejigs, or beefed-up regulation, but the missing link is much more activist owners, who hold companies and their executives to account.

Extravagant pay awards were one sign that the short-term interests of senior executives took precedence over those of long-term owners; UKFI is in a powerful position to reverse that by making sure that new structures are proportionate and that directors' and owners' interests are wholly aligned.

Big banking bonuses were also a sign that the sector had become far too large and powerful. As Bank of England governor Mervyn King said at the Mansion House last week, it is not sensible to allow large banks to combine high-street operations with risky investment banking or funding strategies, and then provide state underwriting: if banks are too big to fail, then they are too big.

The way that New Labour, with its sucking-up to the City and neglect of manufacturing, allowed our economy to become so unbalanced has put us in peril: the size of our banking sector in relation to GDP is five times that in the US, so the risks to taxpayers are correspondingly greater. Thanks to the bankers, in five years, our national debt will be more than double its level before the crisis.

Were they worth it? Most taxpayers, I suspect, think not. Banks - and bankers - still need to be cut down to size.

-Ruth Sunderland, The Observer-